How I Analyze the Markets! - Part 1 or 4
I start my analysis of each of the 22 currency pairs I trade by looking at the yearly chart. What? The yearly chart! Why? Because it is here that I find the most important swing levels. OK! OK! What is a "Swing Level?" A swing level is an important price level on the chart where traders make trade decisions. If there are more buyers than sellers at a swing level the market moves upward. If there are more sellers than buyers the market moves downward. A swing level on a chart is a price level that determines if the future price direction is going to be up or down. So how do I determine swing levels? To find these swing levels I look for price levels where bullish candles open at a swing level and close above the swing level and also where bearish candle open at the same swing level and close below the swing level. In addition if a bullish candle opens above a swing level its lower shadow must touch or move through the swing level and if a bearish candle opens below the swing level then its upper shadow must touch or move through the the same swing level. Further a bullish candle can open below a swing level and close at a swing level or a bearish candle can open above a swing level and close at the same swing level. Also if the bullish candle closes near a swing level but not at a swing level then its lower shadow must touch or move through the swing level or if a bearish candle opens near a swing level but not at a swing level its upper shadow must touch or move through the same swing level. Confused? I am! Let me show you what I mean by looking at some examples on a chart. On the chart look for the horizontal line identified with the number "8". This swing level shows there were 7 times when bullish candles opened at or above this swing level with their lower shadows touching or moving below the swing level or bearish candles closing at or above the swing level with their lower shadow touching or moving below the swing level. This line also shows 1 candle opened at the swing level and closed below it. Now look at the other swing levels and analyze them until you can reach the same count as I did.
There is one nuance I need to tell you about concerning swing levels. The majority of the time multiple swing levels on the chart will be spaced approximately equal distances apart. Having said that nothing is guaranteed. There will be times when multiple swing levels on a chart will be irregularly spaced.
I want to point out to you that there is one swing level that is missing. It is the swing level I have penciled in with the color 'grey'. I have penciled in this future swing level midway between the swing level above and below it. While not yet a valid swing level there does exist the possibility that as price continues to move downward during the year 2020 or 2021 this grey line could turn the trend back upward and would then be considered a possible swing level. I really like to see two valid points on a potential swing level before qualifying it as a valid swing level.
Note: Swing levels can be drawn on any chart time frame besides the yearly time frame so why do I draw them on the yearly time frame? Good question! Here is my answer! Swing levels on the yearly chart take years to develop. Swing levels on monthly chart takes months to develop. Swing levels on weekly charts takes weeks to develop and swing levels on daily charts on takes a few days to develop. When I consider the significance of each of swing levels on each of these time frames I consider the swing levels developed on the yearly chart to be the most significant and the swing levels developed on the daily charts to be the least significant. So what to I mean by significance. It is going to take a several years of trading decisions to move price from one side of the swing level on the yearly chart where on the daily chart it only takes a couple of days worth of trade decisions to move price from one side of the chart to the other side.
OK, so why do I care about the significance of these swing levels? This is the "take-away" from this lesson. If I am trading on the daily or 4 hour chart and price runs into a yearly swing level I know that the majority of times price is going to reverse its trend. Further, should price move through a yearly swing level I know that it will eventually move back to it. Thus these are extremely important price levels to know about and gives the trader an edge over the market.
Here are a few other examples of yearly swing levels:
There is one nuance I need to tell you about concerning swing levels. The majority of the time multiple swing levels on the chart will be spaced approximately equal distances apart. Having said that nothing is guaranteed. There will be times when multiple swing levels on a chart will be irregularly spaced.
I want to point out to you that there is one swing level that is missing. It is the swing level I have penciled in with the color 'grey'. I have penciled in this future swing level midway between the swing level above and below it. While not yet a valid swing level there does exist the possibility that as price continues to move downward during the year 2020 or 2021 this grey line could turn the trend back upward and would then be considered a possible swing level. I really like to see two valid points on a potential swing level before qualifying it as a valid swing level.
Note: Swing levels can be drawn on any chart time frame besides the yearly time frame so why do I draw them on the yearly time frame? Good question! Here is my answer! Swing levels on the yearly chart take years to develop. Swing levels on monthly chart takes months to develop. Swing levels on weekly charts takes weeks to develop and swing levels on daily charts on takes a few days to develop. When I consider the significance of each of swing levels on each of these time frames I consider the swing levels developed on the yearly chart to be the most significant and the swing levels developed on the daily charts to be the least significant. So what to I mean by significance. It is going to take a several years of trading decisions to move price from one side of the swing level on the yearly chart where on the daily chart it only takes a couple of days worth of trade decisions to move price from one side of the chart to the other side.
OK, so why do I care about the significance of these swing levels? This is the "take-away" from this lesson. If I am trading on the daily or 4 hour chart and price runs into a yearly swing level I know that the majority of times price is going to reverse its trend. Further, should price move through a yearly swing level I know that it will eventually move back to it. Thus these are extremely important price levels to know about and gives the trader an edge over the market.
Here are a few other examples of yearly swing levels: